Real Estate Investing

Real estate investing is the purchase, ownership, management and sale of property for profit, through rental income, appreciation or both. Cap rate is the investor's first measure of an income property: value equals net operating income divided by cap rate, and every other return metric builds on the same NOI.

Investors use cap rate to compare properties regardless of price or financing, to judge whether an asking price is fair against recent sales, and to read a market. Low cap rates mean buyers are paying for growth and safety; high cap rates mean they are demanding income for risk.

Cap rate is one of a family. Gross rent multiplier is the quicker gross-income screen. Cash on cash return adds the mortgage and measures the return on the investor's own cash. Net present value and internal rate of return add the holding period and the sale. An investor typically screens with GRM, prices with cap rate, and decides with cash on cash and IRR.

Further reading: Real Estate Investing on Wikipedia.